SVB State of the Markets Report

State of the Markets
Shifting Investor Sentiment Drives Recalibration
April 2016
Written by SVB Analytics:
Steve Allan, CFA
Head of SVB Analytics
Sean Lawson
Manager
Steven Kakowski
Associate
Steven Pipp
Associate
John Ortelle
Manager

What does the rest of 2016 hold for the innovation economy? SVB Analytics took a
look at how we got here to help inform where we may be headed. In the second
quarter of 2016, we anticipate lower public valuations, a continued IPO drought and
a refocus on profits instead of growth at all costs. After the rapid run-up of the past
two years, we see this as a healthy recalibration.
Our review also shows that since the beginning of 2016, VCs continue to raise
impressive amounts of capital, debt remains cheap and private valuations are strong
(even if recent IPOs currently struggle in the public markets). That said, the late-
stage mega-rounds characteristic of 2014 and 2015 appear to be a thing of the past
as investors look for more protection for their investments. This is leading to
investors requiring tighter terms and companies adopting leaner operations.
As with any review of the markets, conditions can turn quickly. We are, however,
confident that the fundamentals driving innovation are alive and well in 2016.
Steve Allan, CFA
The Innovation Economy in 2016

State of the Markets 3
1 Macro Environment
2 Valuations
3 Exits
4 Key Takeaways

Macro
Environment

Capital Is Still Cheap
With interest rates remaining near record lows, investors scour the markets for returns
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
2000 2002 2004 2006 2008 2010 2012 2014 2016
5-Year Nominal Interest Rate
U.S. Treasury 5-Year Constant Maturity: January 2000 – March 2016
Source: S&P Capital IQ

Companies Are Stockpiling Cash
S&P 500 companies’ cash as a percentage of assets approaches 11 percent, indicating
that companies remain risk averse in the post-financial crisis environment
Quarterly Cash and S.T. Investments – S&P 500 (Ex – Financials): Q1 2007 – Q4 2015
4%
5%
6%
7%
8%
9%
10%
11%
12%
$0.3
$0.5
$0.7
$0.9
$1.1
$1.3
$1.5
Cash and S.T. Investments Cash as a % of Total Assets
$Trillions
%ofAssets

Volatility Was Relatively Low Until Mid-2015
Markets saw a sustained period of calm for nearly three years, from 2012 to 2015
^VIX: March 2008 – March 2016
0
10
20
30
40
50
60
70
80
90
Mar 2008 Mar 2009 Mar 2010 Mar 2011 Mar 2012 Mar 2013 Mar 2014 Mar 2015 Mar 2016

Macro Forces Weigh on U.S. Market
Nasdaq Composite Index: January 2011 – March 2016
After years of impressive growth, bull market decelerates amid global
macroeconomic headwinds
Since
January 2014
U.S. Dollar
Hits 10-Year Highs
Oil Price
Hits 10-Year Lows
China
Yuan & Market Shocks
Nasdaq
0
1,000
2,000
3,000
4,000
5,000
6,000
2011 2012 2013 2014 2015 2016
Year 2000 Peak

New Capital Sources Chase Venture Returns
Venture capital deployments reached their highest level since 2000, driven by
increased nontraditional crossover investor appetite from mutual and hedge funds
U.S. Venture Capital Deployed vs. Fundraised by Year: 2000 – 2015
$0
$10
$20
$30
$40
$50
$60
$70
$80
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
VC Fundraising VC Investments CVC Investments Crossover Investments
$105
Source: 2016 NVCA Yearbook, SVB Analytics estimates

Summary: Macro Environment
Capital is
inexpensive…
…public markets and
private investments
soared…
…thanks to relative
stability.

Valuations

Private Valuations Continued Growing in 2015
Median Pre-Money Valuations
Series Seed through Series B: 2011 – 2015
Median pre-money valuations have
roughly doubled over the past five years
across most investment stages
Series C through Series D+: 2011 – 2015
This value increase in the later stages is
fueled by (and requires) rounds larger
than those typically provided by VCs
$4 $4 $5 $5 $6
$7 $8 $9
$12
$14
$21 $21
$26
$33
$41
$0M
$5M
$10M
$15M
$20M
$25M
$30M
$35M
$40M
$45M
2011 2012 2013 2014 2015
Seed Series A Series B
$50 $50
$56 $60
$74
$84
$92
$99
$135
$180
$0M
$20M
$40M
$60M
$80M
$100M
$120M
$140M
$160M
$180M
$200M
2011 2012 2013 2014 2015
Series C Series D+
Source: Pitchbook

Tech Companies Stay Private Longer
Years from founding to IPO (median): 1999 – 2015
The median age of tech companies at IPO has increased following stricter regulatory
requirements post – 2000 dotcom bubble and 2008 financial crisis
With greater access to capital from
traditional and nontraditional
sources and rising valuations, tech
companies are choosing to delay
the scrutiny and transparency of
public markets.
0
2
4
6
8
10
12
14
16
1999 2001 2003 2005 2007 2009 2011 2013 2015
Median tech company age at IPO
Source: Dr. Jay Ritter, University of Florida

3
4
7
2
7
3 3
6
13
11
13
12
15
25
27
12
13
8
4
12
11
10
1
7
3
9
1
7
0
5
10
15
20
25
30
Private IPOs IPOs
2015: Year of the Private IPO
Late-stage companies are opting to raise private capital rather than IPO;
2015 saw four times as many private IPOs (rounds >$100M) as IPOs
Source: CB Insights, S&P Capital IQ
IPO and PIPO Transactions for U.S. Technology Firms: Q1 2012 – Q1 2016
0

Who Are the Crossovers Funding Private IPOs?
As companies delay public offerings, some of the largest fund managers have taken a
primary role in funding late-stage rounds
Source: CBInsights
Global Investments in Venture Rounds – Crossover Investors
TotalRounds
$35M
$46M
$139M
$153M
$110M
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
0
10
20
30
40
50
60
2012 2013 2014 2015 2016
Tiger Global Management Goldman Sachs Wellington Management
Fidelity Investments Coatue Management T. Rowe Price
Blackrock Average Round Size ($MM)
Q1
AverageRoundSize($M)
Average Round Size ($M)

The Advent of the Unicorn
The number of private companies with $1B+ valuations has tripled since 2014,
with nearly half of all unicorn value concentrated in the top 12 “decacorns”
Source: Wall Street Journal
Private Companies with Reported $1B+ Valuations:
Q1 2014 – Q1 2016
Unicorn Market Value Concentration:
March 2016
0
20
40
60
80
100
120
140
160
Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16
$1 - 2B $2-5B $5-10B $10-15B $15-20B $20B+
Uber
$51B
Xiaomi
$46B Airbnb $26B
Palantir $20B
Meituan-
Dianping
$18BSnapchat
$16B
WeWork $16B
Didi Kuaidi
$16BFlipkart
$15B
SpaceX $12B
Pinterest $11B
Dropbox $10B
All Other
$278B

New Unicorn Entrants Eclipse Exits
Net Change in Unicorns by Year: 2014 – Q1 2016
The pace of new companies reaching $1B+ valuations far exceeds the pace of exits,
creating a backlog of private companies with a combined market value of more than $500B
Total
Market Values
Apple
$615B
Note: Exits include IPOs, M&A and revaluations below $1B.
Source: Wall Street Journal; Google Finance 3/31/16
Year End
Unicorns
2013
Exits New Year End
Unicorns
2015
Year End
Unicorns
2014
Exits New Exits New March End
Unicorns
2016
45 -15
+49 79 -11
+76 144 -2
+4
146
0
20
40
60
80
100
120
140
160
All Unicorns
$535B
Google
$521B
Facebook
$321B
Unicorn IPOs
$115B

-500%
-400%
-300%
-200%
-100%
0%
100%
200%
300%
400%
500%
Private Investors Reap Unicorn Rewards
Nearly two-thirds of unicorn exits yielded positive returns relative to the final private
valuation for late-stage investors
Source: Wall Street Journal; S&P Capital IQ
Unicorn Returns at M&A or at IPO Date Close
IPO M&A
Last Private  Exit  Q1 2016
0%
-20%
-40%
-60%
-80%
-100%
<1x IC Recovered

Unicorn Values Fall Precipitously after IPO
The vast majority of unicorns have plummeted since entering the public market
Publicly Traded Unicorn Returns
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
~70% of Unicorns
now trade below their IPO closing price
Median Return: -37%
0%
-20%
-40%
-60%
-80%

Public Values Point to Unicorn Mispricing
State of the Markets 21Source: Wall Street Journal, S&P Capital IQ
Total Returns Compared to Unicorns’ Last Private Round
At the end of Q1 2016, the majority of publicly traded unicorns traded below their
final private valuation, indicating a shift in focus towards profitability
-400%
-300%
-200%
-100%
0%
100%
200%
300%
400%
500%
0%
-20%
-40%
-60%
-80%

Size Limits Exit Options
State of the Markets 22Source: CBInsights, Wall Street Journal
With a limited number of buyers for $1B+ companies, an IPO may be the only choice
for those seeking an exit
All Tech Exits Unicorn Exits
57%
IPO
2%
IPO 816
4
2014 – 2015 2014 – Q1 2016
IPO
M&A

IPO Window Is Uncertain in 2016
State of the Markets 23Source: S&P Capital IQ
U.S. Tech IPOs vs. Nasdaq Performance
During market downturns, the IPO window narrows
U.S. Tech IPOsNasdaq
IPOsonU.S.Exchanges
0
10
20
30
40
50
60
70
80
Nasdaq
202 164

Growth-Stage Mega-Rounds Are Slowing
With public markets less receptive to companies with large private valuations and
unproven business models, private markets are scaling back private IPOs
Source: CB Insights, S&P Capital IQ
$0.5 $0.5 $1.2 $0.3
$1.6
$0.4 $0.6 $1.0
$3.4 $3.1 $2.9
$3.7 $3.7
$6.1
$7.0
$2.4
$3.03
4
7
2
7
3 3
6
13
11
13
12
15
25 25
12
13
$0.0
$1.0
$2.0
$3.0
$4.0
$5.0
$6.0
$7.0
$8.0
0
5
10
15
20
25
30
Proceeds ($B USD) Private IPOs
TotalProceeds($BUSD)
Private IPO Transactions for U.S. Technology Firms: Q1 2012 – Q1 2016

Summary: Valuations and Exits
Private valuations soared… …with a flood of crossover capital…
…but IPOs have underperformed… …and even that window is closing.

Key Takeaways

Exit Conditions Remain Uncertain
State of the Markets 27Source: S&P Capital IQ; Yahoo! Finance
Tech IPO Count: H1 2012 – H2 2015
Companies look for a sustained period of low volatility before going public
0
5
10
15
20
25
30
35
40
45
Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16
H1 2012 H2 2012 H1 2013 H1 2013 H1 2014 H2 2014 H1 2015 H2 2015 Q1 2016
^VIX: Q2 2012 – Q1 2016
20
15
10
5
0

$0.0
$10.0
$20.0
$30.0
$40.0
$50.0
$60.0
$70.0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
VC Fundraising VC Investments
VCs Are Flush with Cash
Cheap capital and crossover investors have left VCs with sizeable war chests
Source: 2016 NVCA Yearbook, SVB Analytics estimates
U.S. Venture Capital Deployed vs. Fundraised by Year: 2002 – 2015
$Billions
0
50
100
150
200
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
U.S. Venture Funding – Capital Reserve Index (Indexed to 2002)

Private Valuations Reveal Divergence
Amid the recent public market pullback, investors are focusing on the most promising
companies, curtailing new early-stage bets while doubling down on late-stage rounds
Source: Pitchbook
Series Seed through Series B: 2011 – Q1 2016
Series C through Series D+: 2011 – Q1 2016
$4 $4 $5 $5 $6 $6
$7 $8 $9
$12
$14
$16
$21 $21
$26
$33
$41
$37
$0M
$5M
$10M
$15M
$20M
$25M
$30M
$35M
$40M
$45M
2011 2012 2013 2014 2015 Q1 2016
Seed Series A Series B
$50 $50
$56 $60
$74
$100
$84
$92 $99
$135
$180
$261
$0M
$50M
$100M
$150M
$200M
$250M
$300M
2011 2012 2013 2014 2015 Q1 2016
Series C Series D+

Investor Sentiment Shapes IPO Market
During bull markets, tech companies focus on growth at the expense of profitability
at IPO, but as investor sentiment shifts away from growth, IPO candidates need to
show strong unit economics and a clear path to profitability
Source: Dr. Jay Ritter, University of Florida
Percentage of Companies Profitable at IPO: 1995 – 2015
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Tech IPOs Non-Tech IPOs
?

Early Trends in 2016
State of the Markets 31Source: SVB Analytics, S&P Capital IQ, Wall Street Journal, Mattermark
Revenue Multiple Compression
Cost Cutting & Layoffs
Alternative Investment Structures
The public markets are no longer valuing growth at all
costs. Instead, investors are favoring proven business
models, which is driving recent multiple compression.
Now that a path to profitability is as important as
growth, companies must carefully manage cash burn
to withstand adverse market conditions.
Given the uncertain exit horizon, alternative
investment structures with stronger protective
covenants will likely replace equity mega-rounds.

Appendix

Report Authors
33
Steven Pipp
Associate, SVB Analytics
spipp@svb.com
Steve Allan, CFA
sallan@svb.com
Sean Lawson
Manager, SVB Analytics
selawson@svb.com
John Ortelle
Manager, SVB Analytics
jortelle@svb.com
Steven Kakowski
Associate, SVB Analytics
skakowski@svb.com
Special Thanks
Vincent Timoney
Director
Silicon Valley Bank
Rob Tompkins
Managing Director
Silicon Valley Bank
Dan Zaelit
Director
Silicon Valley Bank
Natalie Dillon
Associate
Silicon Valley Bank
Daren Motsuoka
Associate
Silicon Valley Bank

About Silicon Valley Bank
For more than 30 years, Silicon Valley Bank has helped
innovative companies and their investors move bold ideas
forward, fast. SVB provides targeted financial services and
expertise through its offices in innovation centers around the
world. With commercial, international and private banking
services, SVB helps address the unique needs of innovators.
This material, including without limitation to the statistical information herein, is providedfor informationalpurposesonly. The materialis based in part on
information from third-party sourcesthat we believeto be reliable,but which have not been independentlyverifiedby us and for this reason we do not represent
that the information is accurate or complete.The information should not be viewed as tax, investment,legal or other advice nor is it to be reliedon in making an
investmentor other decision. You should obtain relevantand specific professionaladvice beforemaking any investment decision.Nothing relatingto the material
should be construedas a solicitation,offer or recommendation to acquire or dispose of any investmentor to engage in any other transaction.
SVB Analytics is a memberof SVB Financial Group and a non-bank affiliate of Silicon Valley Bank. Productsand servicesofferedby SVB Analyticsare not FDIC
insured and are not depositsor other obligationsof Silicon Valley Bank. SVB Analytics does not provideinvestment,tax, or legal advice. Please consult your
investment, tax, or legal advisors for such guidance.
©2016 SVB Financial Group. All rights reserved.Silicon Valley Bank is a member of FDIC and FederalReserve System. SVB>, SVB Financial Group,and Silicon
Valley Bank are registeredtrademarks.(0416-077)
About SVB Analytics
SVB Analytics, a non-bank affiliate of Silicon Valley Bank, serves the
strategic business needs of entrepreneurs, corporates and investors
in the global innovation economy. For more than a decade, SVB
Analytics has helped global business leaders make informed
decisions by providing market intelligence, research, and consulting
services. Powered by proprietary data, SVB Analytics has a unique
view into the technology and life science sectors.

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